Need cash? What investors say cities should do to attract their interest (Smart Cities Council)

By Kevin Ebi

At a very basic level, any city project is really an investment: projects are designed to provide more in benefits than they cost to produce. That’s now how investors are starting to see city projects and they’re increasingly willing to fund them for a piece of the returns.

Different types of investors talked at the recent American Planning Association annual conference in Seattle, educating city planners about how they can tap into this valuable source of funds to accomplish projects that cities can’t pay for on their own.

New investment model develops
The new investment model is actually rooted in something that smart cities are already doing: using data to demonstrate accountability. The twist is that investors assume risk and manage and design the projects to achieve goals that are set by the city.

The city pays the investors based on how well they perform. The idea is that those payments come from the funds that cities save through the success of the program. It eliminates the public’s risk and both the community and the investors enjoy a return on investment.

Investing in inmates
The first test of this model — which in Europe is known as a Social Impact Bond, even though no bonds are actually issued — came at the Peterborough prison in eastern England. Officials wanted to reduce the number of men who reoffend once they’re released. Investors stepped up to design and manage anti-recidivism programs.

Halfway through the four-year program, the recidivism rate dropped 8.4%. That is short of the 10% stretch goal that would have triggered an early payment to investors. While some critics see that as a failure, the program is on track to achieve the base requirement by next year. The prison reduces an expensive problem and the investors get back their capital plus a return.

Supporters say the program is delivering those results because investors are motivated to find solutions. They only get paid if they do. In this project, the backers have studied which types of crimes offenders return to, why former inmates drop out of support programs and what type of contact works best. It’s a level of creativity and flexibility that’s typically unheard of in government.

“Governments aren’t always the seat of talent and innovation,” Donald Hinkle-Brown, president and CEO of The Reinvestment Fund, told an impact investing panel.

Partnering with foundations and charities
Foundations and charities may be another source of funds for enterprising cities. In the past, cities looked to those groups only for grants. Now they’re becoming investment partners as well.

Foundations are required to give away at least 5% of their money, but they’ve typically put the rest in traditional investments to regenerate what they give. Frequently, those investments ran counter to the foundation’s mission, like a health care charity that holds Big Tobacco stock.

Steve Whitney, senior program officer at the Bullitt Foundation, an environmental foundation that works in the Pacific Northwest, now says more than 75% of its funds are used for socially responsible or mission-related investments. And that’s in addition to the 7% that it gives away in the form of grants.

Whitney says hospital foundations may be a good place for cities to look. Healthcare reform has resulted in less demand for charity care, so they need to find other ways to give. A city project that helps encourage more people to get outside and exercise, for example, still fits with the foundation’s mission and it may be willing to help fund it.

What does your city need to do?
The panelists told planners that there’s a lot of opportunities for cities. The problem is most cities don’t make it easy for investors.

Whitney said cities need to do more to break down departmental silos. Like investors, a foundation like his wants its grants to have the biggest impact possible. Programs within a city department -- or even only within city hall -- don’t tend to have much impact.

“You need to break down the walls between jurisdictions,” Whitney said. “Ultimately, that gets you to a point where you can find some creative ways to raise money.”

Hinkle-Brown says cities need to have their acts together before they even approach investors. Investors have no interest in navigating city politics to get all the stakeholders on board. To an investor, that process is simply waste.

“There is a dearth of well-organized communities,” he said. “(Investors) are drawn like moths to a flame when we find one.”